Research Proposal Eco

Application of Managerial Economics Theories and Practices in the Tobacco Industry of Bangladesh

Managerial EconomicsE-501Application of Managerial Economics Theories and Practices in the Tobacco Industry of Bangladesh

Date of Submission: March 21, 2015Application of Managerial Economics Theories and Practices in the Tobacco Industry of Bangladesh

Prepared forDr. A.K.M. Saiful Majid ProfessorCourse Instructor: Managerial EconomicsInstitute of Business Administration (IBA)University of Dhaka

Prepared byNameIDBatch

Nahian-Al-Hossain Basunia1751st

Laila Afreen2251st

A.M.M. Habibul Mustafa3751st

Md. Delwar Hossain Mazumder3851st

Institute of Business AdministrationUniversity of Dhaka

March 21, 2015Letter of Transmittal

15 March, 2015Dr. A.K.M. Saiful MajidProfessorInstitute of Business AdministrationUniversity of DhakaDhakaSubject: Submission of Project ProposalDear SirIt is an immense pleasure for us to submit the proposal on Application of Economics Theory and Practices in Tobacco Industry of Bangladesh with Reference to British American Tobacco Bangladesh as a partial fulfillment of the requirement of course named Managerial Economics of MBA program for our course prescribed group project.We would like to thank you for giving us this unique opportunity to further enhance our knowledge on the principles and applications of Economics. We are truly honored to have you guiding us with your immense repository of knowledge and experience. We sincerely hope that we will be able to fulfill your expectations and do justice in capturing the true essence of your exceptional teachings in our project.We would like to convey our special thanks and gratitude to you for patronizing our effort & for giving us proper guidance and valuable advice. We have tried our best to cover all the relevant fields. We will be honored to provide you any additional information, if necessary.

Thank you.Sincerely yours,A.M.M.Habibul Mustafa, ZR 37Md. Delwar Hossain Mazumder, ZR 38Laila Afreen, RQ 22Nahian-Al-Hossain Basunia, ZR 17A. Introduction

Tobacco-consumption is a widespread scenario in Bangladesh. More than half of all men and nearly one in three women use tobacco in Bangladesh, according to a latest study on tobacco consumption. Conducted by Human Development Research Centre (HDRC) and Campaign for Tobacco-Free Kids, the study looked at tobacco consumption trends among people aged 15 and older, estimating that 46 million people out of 107 million consume tobacco.About 58% of men and 29% of women smoke or chew tobacco in one of the cheapest tobacco countries across the globe making up 43% of its total adult population. Bangladesh ranked among top tobacco consuming countries where 57,000 people over the age of 30 die each year from tobacco-related illness. Though Bangladesh signed WHO Framework Convention on Tobacco Control (FCTC) in 2003 to control tobacco use by all means, it is yet to form a national agency that experts think a key to fight tobacco. The survey revealed that tobacco consumption in Bangladesh sharply rose in recent years, with cigarette sales going up by 40% and tobacco use in the form of bidi increased by 80% between 1997 and 2013. Compared to 50.9 billion cigarettes bought in 1997, the consumption was 76 billion pieces in 2013, while bidi sales climbed from 43 billion in 1997 to over 82 billion in 2013. Excise taxes on cigarettes account for half of the retail cigarette price in the country while total taxes are two-thirds of the retail price. Anti-tobacco campaigners allege that the policy is at odds with countries having comprehensive tobacco reduction approach where excise taxes typically account for 70% of retail price with total taxes claim 75% of it. Different tax rates on different price slabs only benefit tobacco manufacturers, they argued. Amongst the tobacco manufacturers, British American Tobacco Bangladesh has emerged and positioned itself as the premier multinational company in Bangladesh. It has experienced a remarkable growth and development in the tobacco sector. It has a fame of being one of the largest MNCs in Bangladesh having a glorious history of serving over 100 years. This paper is going to observe the dynamics of Tobacco industry, from the perspective of Economics. During this, British American Tobacco Bangladesh is taken as a reference.

A.1 Rationale of the Study

The study will be conducted with a view to knowing whether tobacco industry is using and complying with the different concepts and principles of Managerial Economics that we have read throughout the semester. To do so, British American Tobacco Bangladesh will be taken as a benchmark. During the study, we will analyze the demand and supply scenario of tobacco products, find out the major players in the industry, the market structure, cost behavior and government control in terms of price control and tax imposition and its effect on the consumers economic behavior.

A.2 ObjectivesA.2.1 Broad ObjectiveThe broad objective of the study is to do a comprehensive scrutiny on British American Tobacco Bangladesh (mostly concentrated in Dhaka), i.e. to collect and amalgamate all probable important data regarding the tobacco industry in Dhaka and to give an overall insight of this sector. The whole study will be done from the perspective of principles and concepts of Economics that we have learned so far. A.2.2 Specific Objectives1. To understand the principles of economics and their application in British American Tobacco Bangladesh and in that very industry.

2. Absolute and competitive advantage of British American Tobacco Bangladesh in this sector.

3. To understand the demand and supply function, market equilibrium, income and substitution effects on tobacco products of British American Tobacco Bangladesh.

4. How price elasticity of demand and supply works in the tobacco industry, and computing both for British American Tobacco Bangladesh also.

5. Price ceiling and price floor existing in the tobacco sector, consequence of this control in the city.

6. Impacts of Govt. regulation and taxation in relation to British American Tobacco Bangladesh.

7. Effects of Inflation on the tobacco sector.

8. Recommendations for enhancement and growth of the tobacco sector in Bangladesh.A.3 Scope of the StudyThe geographic scope of this study is confined within Dhaka city. For the demand side of the study, information will be drawn from British American Tobacco Bangladesh, and existing and potential buyers within Dhaka city. For the information on supply side, executives of British American Tobacco Bangladesh and interview with employees of the organization will be covered.A.4 MethodologyThe study is to be conducted on two sets of population, one representing the demand side and the other the supply side of the tobacco sector. On the demand side, the population consists of existing and potential consumers, and the supply side consists of interview with employees of the organization. Interviews and questionnaires would consist much of the way through which information would be gathered for this study. A.4.1 Sources of DataThis study will be conducted based on both primary and secondary data. The secondary study will mainly require for the background study on this sector. For the supply side, interviews are the primary sources of data. For the demand side, primary sources will be from existing and potential clientele. Besides, some secondary sources like small scale research reports conducted will also be used.Primary source of information would also come from the interview and questionnaire that will be conducted for the purpose of the study.

A.4.2 Research DesignThis study is a combination of both Exploratory and Descriptive research methods. A.4.3 Instruments of Data CollectionVarious articles, websites and newspapers will be taken into account to get the necessary secondary information. Questionnaires will enable to gather specific information relating to supply and demand, price ceiling and price floor, govt. regulations and taxation, and inflationary effects. The success of the questions could be measured by the quality and arrangement of the questionnaire itself. This is because the information obtained would be fresh and unique.A.4.4 Sample DesignAs mentioned above, this study was conducted on two sets of population, one representing the demand side and the other the supply side of the tobacco sector.A.4.5 Sampling TechniqueIn this survey, non-probabilistic sampling methods will be selected because the complete sampling frame for the target population was not available that is necessary to conduct the usual probabilistic sampling techniques. Besides, limited time and budget would guide the researchers to go for non-probabilistic methods.A.4.6 Sample SizeThe sample size will be small. Thirty (30) potential and existing customers/employees will be interviewed.

A.5 TimelineThe Conversion of Work Break down Structure into the Gantt chart is as follows:

Work Plan Time in Weeks

1 2 34

Beginning of project:Planning

Organizing of information

Developing, assessing and relating principles

Findings and Recommendations

Figure: Gantt chart (Source: Self- Made, 2015)The above Gantt chart directly demonstrates the breakdown of the four phases of the project. The four phases are planning, organizing, implementation and the controlling. The planning phase includes concept development and feasibility studies, identifying the location, planning research and formulating strategies. The planning phase takes up to 1 week. The planning phase takes most of the time because without proper planning, it will be difficult to implement it. The organizing phase includes conducting research in the selected location and evaluation. The organizing phase takes 2 weeks. The implementation phase include the developing, assessing and relating theories to the information collected on tobacco industry of Bangladesh. To do this, it will cost 1 week for us. Getting the overview of following of Man. Eco. Principles,finding out the drawbacks and formulation of recommendations are the main concerns of the control stage. This will take 1 week to complete. As a whole we will take 4 weeks to complete the project. In the end, comes the closure of the project. The tentative submission date is 17th april, 2015.A.6 Limitations

While conducting the study there maybe few obstacles that would constrain the effectiveness and comprehensiveness of the study. Certain limitations might hamper the accuracy of this study. First of all, employees may be reluctant to give out company information. The accuracy of information provided by the company may not contribute to the overall quality or success of the study. Bangladesh does not have organized secondary data of this sector unlike most developed countries. Thus the information generated from primary research may not reflect the precise scenario of current needs and our limited sample size may not be large enough to make accurate generalizations about the entire population.

B. Literature Review

According to Research Study on British American Tobacco Bangladesh, British American TobaccoBangladesh(BATB)isasubsidiaryofBritishAmerican Tobacco Group. It has been incorporated in 1972 as Bangladesh Tobacco Company (BTC).Since 1972 BATB has been operating in Bangladesh as one of the leading multinational organization. Since 1972 BATB is operating as the market leader in the tobacco industryby providing someof themost powerful global andlocal brands. At present BATB isthe highesttaxpayingcompany,contributingaround7%ofthetotalrevenueofthe Government of Bangladesh. BATB is renowned as one of the most prominent socially responsible and ethical company in the minds of the citizen.The tobacco industry of Bangladesh is an age old industry. There a distinct monopoly in this industry where British American Tobacco Bangladesh (BATB) leads the market with more than 50% market share.

The main cigarette manufacturers today are:

British American Tobacco Bangladesh Dhaka Tobacco Industries AbulKhair Tobacco Nasir Tobacco Azizudin Industries and New Age Tobacco.The main biri manufacturers are: AkijBiri AbulBiri NasirBiri KarikarBiri Aziz Biri and Hundreds of local biri manufacturers.The industry is very price sensitive in nature. It is also a stick selling market, which means that most of the tobacco consumers normally buy tobacco in sticks, not in packs. These two features-price sensitive and stick selling-influences the business philosophies of the companies.At the moment, there are two main tobacco industry associations i.e. Bangladesh Cigarette Manufacturers Association (BCMA) and Bangladesh Biri Manufacturers Association (BBMA) representing the industry.

B.1 - Industry Segmentation:The tobacco industry can be divided into two markets-Biri market and Cigarette market.

B.1.1 - Biri Market:It is basically the non-filtercigarette market with a very low pricing. So biri is by far the dominating segment in the tobacco industry. Recent trend has shown that biri market is experiencing decline which is a favorable sign for the cigarette market. BATB does not operate in this market. The major brand in this market is AkizBiri, product of Dhaka Tobacco Industries. This isby far the most popular Biri in the country.Cigarette Market:Cigarette market is where BATB has all its focus. The market covers the rest 28% of the industry. But the value of this market is lot higher than the biri market. The market can be divided into four segments on the basis of price. They are: Premium Medium Low Very LowBATB operates in the top three segments of the industry. It does not operate in the very low segment. Along with BATB, DTI and Alpha Tobacco is also a major player in the low segment.Today, the market is estimated to be 64.2 billion sticks of biri and 51.8 billion sticks of machine manufactured cigarettes. Biri overtook cigarettes as the more popular smoked product in 1979. However, the market for biri has been on a declining volume trend since 2003. This reflects the switch by consumers due to social pressure, urbanization, literacy rate, economic growth and awareness by consumers. The market has a high International Brand share (18.2%).

A.1.2 - Competitive Scenarios in the Cigarette Market:In May 2008, Philip Morris International launched both full flavored and light variants of Marlboro brand cigarettes in different markets of Dhaka. Dhaka Tobacco Industries is manufacturing and distributing the brand.BAT Bangladesh and Dhaka Tobacco Industries together hold more than 80% of the cigarette market share.Tobacco products are distributed either by manufacturers themselves, third party distributors or wholesalers. The sales and distribution effort requires a large number of field employees and agents because they have to serve about 880,000 individual retail outlets throughout Bangladesh with a growth of 10% per annum.The number of retail outlets is estimated to be growing by about 8% a year. The proliferation of retail outlets is mainly due to the ease of entry and the low capital requirement. Many of these outlets operate on limited capital and are unable to purchase quantities beyond their immediate daily sales. The high number of retail outlets has created a stick market and consequently imposed more frequent sales visits compared to other similar businesses.The competition in the cigarette market is based on the price segment. There are individual competitive brands in each price segment. There was no competition in the premium and medium segment where the top International Brands of BATB dominate the market. But when Dhaka Tobacco Industry (DTI) launched the brand Marlboro and Thames in the both Premium and Middle segment the competition is raised. But still in the Segment of premium and Medium BATB is the leader still. Only in the low segment there is a competition where mainly three companies have theirindividual stakes and trying to take the segment leadership. In the very low segment, there is also competition among brands like Sun Moon, Five Star, Wilson, Gold Hill etc (Anon., n.d.)http://www.assignmentpoint.com/business/finance/research-study-british-american-tobacco-bangladesh.html

B.2 - Segment wise Market Growth of Tobacco Industry

The tobacco industry in Bangladesh has an annual market size of about 135 billion. Market penetration in Bangladesh is about 40% .Tobacco sales consists of 52% of filtered cigarettes and 48% of unfiltered varieties, that is, bidi.

British American Tobacco (BATBC) is the only listed tobacco manufacturer with 99% market share in the high end. BATBCs shareholding structure is as follows:11% by Investment Corporation of Bangladesh (majority government - owned NBFI) and 16% free float. Other players in the tobacco industry are domestic conglomerates of significant size: Dhaka Tobacco and AbulKhair Tobacco.

BATBCs low segment market share increased from 20% in 2006 to 60% in 2010. Net profits grew at double digit rates in 2006 -2011. Excises are high and constitute 11% of the Government Tax Revenue. Future profitability is expected to be driven by consumers upgrading to higher segments.http://www.slideshare.net/SajidHuq/bangladesh-growth-report-brac-epl-strat-sales-feb-27-2013refer pg - 39

B.3 -GDP Share of Tobacco Industry

On the global scale, Bangladesh ranks 21st in tobacco cultivation, with the largest being China, followed by the US and India. With a total production of more than 38,000 metric ton of leaf, Bangladesh accounts for about 0.4 % of the total volume of tobacco produced in the world. Tobacco contributes less than 0.01% to the GDP of Bangladesh. (Placeholder1) (Fuad, 2012)http://www.thefinancialexpress-bd.com/2014/09/18/56759/print

B.4- Government Tax and Other Regulations:

B.4.1 Tobacco Tax Structure in BangladeshHistorically, price bands were created to recognize different quality and price bands of cigarettes that range from low to high end. When VAT was first introduced on cigarettes in FY 1992- 93, there were four price bands. However, in FY 1994-1995 and FY 1995-96, this number was increased to 5 under pressure of the cigarette industry. Increasing the number of price bands led to massive switching to lower bands when tax rates were increased. To prevent this, the number of bands was reduced to 4 in FY 1996-97. This continued up to the middle of FY 1998- 99.In January 1999, the number of price bands was increased to 6 as a result of collective bargaining of the cigarette industry. This continued up to June 2000. Again the number of price bands was reduced to 4 in FY 2000-01 through FY 2001-02. In FY 2002-02, the government took the initiative to reduce the number of price slabs to 3 to augment revenue. This continued through FY 2003-04. Finally, the number of bands was raised to 4 in FY 2004-05 and since then the number of price bands remained at 4.

B.4.2 Lopsided Tobacco Taxation Policy

Although cigarettes have been slapped with across-the-board tax hike, bidi, the indigenous smoking stick, is left out of the new tax burden. Although price slabs increase substantially, SD increased marginally during FY 2011-12 over FY 2010-11

FY 2010 - 2011FY 2011 - 2012Change (%)

Category of Cigarettes Price per pack of 10 (In Taka) SD (%) Price per pack of 10 (In Taka) SD (%) Changes in Price (%) Changes in SD (%)

Low8.40 - 9.153311.00 11.503630.959.09

Medium18.40 - 19.005322.50 23.005522.283.77

High27.00 32.005632.00 36.005818.523.57

Premium52 and above5860 and above6015.383.45

NB: In all cases, Value Added Tax (VAT) is imposed at the rate of 15%. The provision of deferred payment (tax payment after 14 days) for cigarette manufacturers was repealed.

B.4.3 - Administrative Issues in Tobacco Taxation

Tobacco taxation in Bangladesh is governed by Value Added Tax Act, 1991. Out of the three wings of the NBR namely, income tax, VAT and customs wings, VAT Wing is responsible for enforcing the law. The organizational structure of the NBR is shown in Figure 1 Figure 1: Organizational Dimensions of NBR

The enforcement of tobacco tax is done by a VAT Commissionerate (headed by a Commissioner) and its field offices namely, Divisions and Circles. Several problems persist in the NBRs tax administration. These are: Most of the NBRs tax processes are manual and there is little in the nature of taxpayer education and taxpayer services. The NBR faces the acute shortage of trained tax officials as well as physical infrastructure. It also faces problems in its functioning due to lack of distribution of tax work by function and size. There is little research-policy linkage.

B.4.4 - Political Dimensions of Tobacco Taxation

According to the Constitution of Bangladesh, levy or collection of any tax requires the approval of the Parliament. Stakeholder consultation for new tax proposals commences from March every year. During the pre-budget period, the NBR holds consultation with the members of business associations, different levels of government, Members of Parliament (MPs), media and NGOs and proposes tax measures. A tax proposal is placed before the Council of Ministers for its concurrence and then it is introduced in the form of Finance Bill as budget document to the Parliament in the second week of June every year.Enhancing consumer price of bidi through tax measures appears more challenging for the NBR for political reasons. Firstly, several MPs are involved in tobacco business. Secondly, it is claimed that about 2.5 million workers are engaged in bidi industry, many of whom are poor women and children. Controlling bidi consumption will force bidi manufacturers to downsize their production, which will in cause unemployment of bidi workers. Thirdly, bidi consumers belong to the poorest segment of the society. Raising tax and price of bidi will, therefore, result in loss of popularity of the government among this population.

The pressure of bidi manufacturers is evident from the fact that since FY 2005-06 there is no change in SD rate in bidi. Moreover, the tariff value for a pack of 25 sticks non-filtered bidi remained at Tk 3.1579 since FY 2008-09.During FY 2011-12 budget cycle, more than 120 MPs made written representation to the NBR not to increase bidi price. Rather they demanded complete withdrawal of tax from bidi. Bidi manufacturers association created substantial pressure to split the tariff value (bidi tax base) into three price bands namely, 12 sticks per pack, 10 sticks per pack and 8 sticks per pack and they succeeded. Splitting of tariff value in FY 2011-12 may have three effects on revenue and health. Firstly, there may be huge substitution effect from medium and low bands of cigarettes to bidi. Secondly, the scope of revenue evasion may increase because of opportunity for swapping banderols between different price slabs. Thirdly, this may also have negative impact on health because of likely increased consumption of bidi.

B.4.5 - NBR-WHO Collaboration on Tobacco Taxation

The main objective of the NBR-WHO collaboration is to strengthen the policy development process and tobacco tax administration at the NBR. In May 2010, WHO provided technical assistance for developing Tax Simulation Model to be used by the NBR.WHO helped to establish a Tobacco Tax Cell at the NBR: to develop tobacco database to conduct research on tobacco market trends; to analyze the impact of tobacco tax on health and revenue to formulate evidence based policy on tobacco taxation. WHO supported several training programs for NBR officials to strengthen their capacity.

http://www.who.int/tobacco/economics/meetings/wctoh_2012_tob_tax_bangladesh.pdf

B.5 - Demand for Tobacco in Bangladesh

Over the past decade, a growing number of studies have examined the impact of taxes and prices on tobacco use in low and middle-income countries. These studies have estimated a wide range of price elasticities, with some, but not all, indicating that demand for tobacco products is more responsive to price in low and middle-income countries than it is in high income countries. For example, Hu and Mao (2002) estimate that the price elasticity of cigarette demand in China ranges from 0.50 to 0.64, while Karki and colleagues (2003) estimate an overall price elasticity of cigarette demand of 0.88 in Nepal. 27,28 John (2008) examined demand for multiple tobacco products in India, estimating price elasticities of 0.35, 0.91, and 0.88 for cigarettes, bidis, and leaf tobacco, respectively. 29 More recently, Guindon and colleagues (2011) updated and extended Johns analysis, estimating cigarette and bidi price elasticites of 1.03 and 0.94, respectively. 30 As in studies for high-income countries, studies from low and middleincome countries that account for the addictive nature of tobacco use find that demand responds more to price in the long run. For example, Aloui (2003) estimates short run price elasticities for tobacco use in Morocco in the range from 0.51 to 0.73, and estimates long run elasticities that range from 1.36 to 1.54. 31 Findings from studies bas ed on individual-level survey data on adult tobacco use indicate that taxes and prices influence both tobacco use decisions (prevalence) and the frequency and amount of tobacco consumption. In general, the estimates from highincome countries suggest that about half of the impact of price on tobacco use results from its effect on prevalence. Given that relatively little initiation occurs during adulthood, these changes largely result from cessation among adult users. This is confirmed by a small number of studies which find that increases in price lead a number of current users to try to quit, with many users successful in doing so in the long run.

B.5.1 Existing Evidences of Demand for Tobacco in Bangladesh

To date, a few studies have estimated the price elasticity of demand for tobacco products in Bangladesh. Ali and colleagues (2003) estimated tobacco demand for Bangladesh using annual time series data from 1983 through 1999 to estimate a relatively parsimonious model that included prices and per capita GDP as the only explanatory variables. They obtained a negative but statistically insignificant price elasticity of 0.27, and a positive and significant income elasticity of 0.62. They did not estimate bidi demand given the lack of data on bidi prices and consumption over time. Guindon and colleagues (2003) estimated cigarette demand for Bangladesh as part of a larger study that also estimated demand in Indonesia, Nepal, Sri Lanka, Thailand, Maldives, and Myanmar. 36 Using annual time series data from 1970 through 2000, they too estimated a relatively parsimonious model that included only price and income as determinants of demand. In addition to estimating a conventional demand model, they also estimated a myopic addiction model. Like Ali and colleagues, they found no significant effect of prices on cigarette demand in either model. In their country-specific models for the other countries they examined, they generally found negative and often significant price effects, with shortrun price elasticity estimates for cigarette demand clustered around 0.5 and long-run elasticity estimates clustered around 0.7. More recently, Nargis and colleagues (2010, 2011) have used the individual level data from the ITCBangladesh survey to estimate the price elasticity of cigarette and bidi demand in Bangladesh. 37,24 Given the low prevalence rates of cigarette smoking among women, cigarette demand models were estimated for adult males only; bidi demand models were estimated for both men and women. In addition to price and income, Nargis and colleagues controlled for a variety of other factors in their demand models, including age, marital status, educational attainment, employment status, household size, urban/rural location, the number of years since initiation, and survey year (in the 2011 analysis that used both the 2009 and 2010 survey data)

Table : Estimated Price Elasticities of Cigarette and Bidi Demand from International Tobacco Control Policy Evaluation Project (ITC) Bangladesh Surveys, 2009 & 2010

2009Pooled 2009 & 2010

CigarettesBidiCigarettesBidi

Prevalence-0.29***-0.46*-0.44***0.03

Conditional Demand-0.14***-0.18-0.22***-0.22**

Total-0.43-0.64-0.66-0.22

Source: Nargis et al.(2010, 2011)Note:***,** and * represents estimates statistically significant at 1%, 5% and 10% significance levels respectively.

B.5.2 New Estimates for Tobacco Demand in Bangladesh

Annual time series data on aggregate cigarette consumption from 1981 through 2004 to generate new estimates of price elasticity was used. In contrast to the earlier time-series analyses by Ali and colleagues (2003) and Guindon and colleagues (2003), we apply an econometric methodology that accounts for the time series properties of the data. 34,35, * Given available data, our model is similarly parsimonious and includes only price and income as determinants of cigarette demand. Aggregate cigarette consumption data were obtained from the Bangladesh Bureau of Statistics and were divided by population to obtain a measure of per capita consumption. Cigarette price data reflect the inflation adjusted price of Star brand cigarettes, the most popular brand of cigarettes consumed in Bangladesh over this time period.

Cigarette price is found to have a negative and statistically significant impact on cigarette demand in Bangladesh, while income is found to have a positive and statistically significant impact. Estimated short run price and income elasticities are 0.41 and 1.14 respectively, with long run estimates of 0.57 and 1.46. Together, the estimates imply that the past decades general trend towards increasingly affordable cigarettes, plus the combined effect of reductions in cigarette prices and increases in household income, have led to significantly higher cigarette smoking in Bangladesh than would have been the case had cigarettes remained less affordable.

http://global.tobaccofreekids.org/files/pdfs/en/Bangladesh_tobacco_taxes_report.pdf

C. Theories to be covered

C.1 Circular Flow Diagram

The circular flow of income or circular flow is a model of the economy in which the major exchanges are represented as flows of money, goods and services, etc. between economic agents. The flows of money and goods exchanges in a closed circuit and correspond in value, but run in the opposite direction.

C.2 Porters Five Forces

Porter five forces analysis is a framework to analyze level of competition within an industry and business strategy development. It draws upon industrial organization (IO) economics to derive five forces that determine the competitive intensity and therefore attractiveness of an Industry. Attractiveness in this context refers to the overall industry profitability. An "unattractive" industry is one in which the combination of these five forces acts to drive down overall profitability. A very unattractive industry would be one approaching "pure competition", in which available profits for all firms are driven to normal profit.

C.3 Principles of Economics (Relating to the Ten Principles of Economics)

How people make decisions:1. People Face Tradeoffs. To get one thing, you have to give up something else. Making decisions requires trading off one goal against another. 2. The Cost of Something is What You Give Up to Get It. Decision-makers have to consider both the obvious and implicit costs of their actions. 3. Rational People Think at the Margin. A rational decision-maker takes action if and only if the marginal benefit of the action exceeds the marginal cost. 4. People Respond to Incentives. Behavior changes when costs or benefits change.How the economy works as a whole:5. Trade Can Make Everyone Better Off. Trade allows each person to specialize in the activities he or she does best. By trading with others, people can buy a greater variety of goods or services. 6. Markets Are Usually a Good Way to Organize Economic Activity. Households and firms that interact in market economies act as if they are guided by an "invisible hand" that leads the market to allocate resources efficiently. The opposite of this is economic activity that is organized by a central planner within the government. 7. Governments Can Sometimes Improve Market Outcomes. When a market fails to allocate resources efficiently, the government can change the outcome through public policy. Examples are regulations against monopolies and pollution. How people interact:8. A Country's Standard of Living Depends on Its Ability to Produce Goods and Services.Countries whose workers produce a large quantity of goods and services per unit of time enjoy a high standard of living. Similarly, as a nation's productivity grows, so does its average income. 9. Prices Rise When the Government Prints Too Much Money. When a government creates large quantities of the nation's money, the value of the money falls. As a result, prices increase, requiring more of the same money to buy goods and services. 10. Society Faces a Short-Run Tradeoff Between Inflation and Unemployment. Reducing inflation often causes a temporary rise in unemployment. This tradeoff is crucial for understanding the short-run effects of changes in taxes, government spending and monetary policy.

C.4 Invisible Hand A term coined by economist Adam Smith in his 1776 book "An Inquiry into the Nature and Causes of the Wealth of Nations". In his book he states:"Every individual necessarily labors to render the annual revenue of the society as great as he can. He generally neither intends to promote the public interest, nor knows how much he is promoting it ... He intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention. Nor is it always the worse for society that it was no part of his intention. By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it. I have never known much good done by those who affected to trade for the public good."Thus, the invisible hand is essentially a natural phenomenon that guides free markets and capitalism through competition for scarce resources.

C.5 Demand and Supply Function

Supply and demand is perhaps one of the most fundamental concepts of economics and it is the backbone of a market economy. Demand refers to how much (quantity) of a product or service is desired by buyers. The quantity demanded is the amount of a product people are willing to buy at a certain price; the relationship between price and quantity demanded is known as the demand relationship. Supply represents how much the market can offer. The quantity supplied refers to the amount of a certain good producers are willing to supply when receiving a certain price. The correlation between price and how much of a good or service is supplied to the market is known as the supply relationship. Price, therefore, is a reflection of supply and demand. The relationship between demand and supply underlie the forces behind the allocation of resources. In market economy theories, demand and supply theory will allocate resources in the most efficient way possible.

C.6 Game theoryA model of optimality taking into consideration not only benefits less costs, but also the interaction between participants. Game theory attempts to look at the relationships between participants in a particular model and predict their optimal decisions.

C.7 Price War

When a company wants to increase market share, usually the easiest way is to reduce prices, which increases product sales. The competition may be forced to follow suit if its products are similar. As prices get lower the quantity of sales increases and customers receive the benefits. Eventually, a price point is reached that only one company can afford. Some companies will even sell at a loss in an attempt to eliminate the competition completely.

C.8 Production Function

A production function specifies the maximum output that can be produced for a given amount of input. Alternatively, a production function shows the minimum quantity of input necessary to produce a given level of output.

C.9 InflationIn economics, inflation is a sustained increase in the general price level of goods and services in an economy over a period of time. When the price level rises, each unit of currency buys fewer goods and services. Consequently, inflation reflects a reduction in the purchasing power per unit of money.

C.10 Fiscal PolicyIn economics and political science, fiscal policy is the use of government revenue collection (mainly taxes) and expenditure (spending) to influence the economy. According to Keynesian economics, when the government changes the levels of taxation and government spending, it influences aggregate demand and the level of economic activity.

C.11 Monetary policyMonetary policy is the process by which the monetary authority of a country controls the supply of money, often targeting an inflation rate or interest rate to ensure price stability and general trust in the currency.

C.12 Exploratory researchExploratory research is research conducted for a problem that has not been clearly defined. It often occurs before we know enough to make conceptual distinctions or posit an explanatory relationship. Exploratory research helps determine the best research design, data collection method and selection of subjects. The objective of exploratory research is to gather preliminary information that will help define problems and suggest hypotheses.

C.13 Descriptive researchDescriptive research is used to describe characteristics of a population or phenomenon being studied. It does not answer questions about how/when/why the characteristics occurred. Rather it addresses the "what" question (what are the characteristics of the population or situation being studied?). The objective of descriptive research is to describe things, such as the market potential for a product or the demographics and attitudes of consumers who buy the product.

C.13 Causal researchCausal research (also referred to as explanatory research) is the investigation of (research into) cause-and-effect relationships. In order to determine causality, it is important to observe variation in the variable that is assumed to cause the change in the other variable(s), and then measure the changes in the other variable(s). The objective of causal research is to test hypotheses about cause-and-effect relationships. If the objective is to determine which variable might be causing a certain behavior, i.e. whether there is a cause and effect relationship between variables, causal research must be undertaken. In order to determine causality, it is important to hold the variable that is assumed to cause the change in the other variable(s) constant and then measure the changes in the other variable(s).

D. Industry Overview

Cigarette manufacturing is highly concentrated in Bangladesh, while bidi manufacturing is much more fragmented. Cigarette markets are dominated by two firmsBritish American Tobacco Bangladesh (BATB) and the domestic Dhaka Tobacco Industries (DTI), a part of the Akij Group. BATB is one of the oldest tobacco product manufacturers in Bangladesh, in operation for over 100 years. BATB brands account for almost 46.8% of cigarette consumption in 2014, down somewhat from the 54% half of the market the company had controlled as recently as 2006. DTI is part of the Akij Group, a large domestic conglomerate that includes a variety of subsidiaries involved in cement, computers, foods & beverages, jute, textiles, pharmaceuticals, and much more. DTI has historically focused on the lower priced segment of the market. DTIs key brands include lower priced brands Sheikh, K-2, Five Star, Red & White, Real, and Surma; other major brands are Navy (mid-priced) and Caste (premium). In addition, in 2007 DTI entered into an agreement with Philip Morris International (PMI) to market PMIs brands, most notably Marlboro, in the Bangladeshi cigarette market. DTIs share of the cigarette market is around 35.9% in 2014. There are a number of other smaller domestic cigarette companies operating in Bangladesh, including Abul Khair Tobacco Company (AKTC), Jamil Tobacco Company Ltd., Alpha Tobacco Manufacturing Company, Azizuddin Industries Ltd., Sonali Tobacco Company Ltd., National Tobacco, and Nasir Tobacco. Together, they account for 15-20% of the Bangladeshi cigarette market. To date, Japan Tobacco International and Imperial Tobacco/Altadis, the worlds other leading multinational tobacco companies, have not established a significant presence in Bangladesh, with imports of their brands and other multinational brands accounting for a very small share of the Bangladeshi market. B&H, switch, State Express 555, Gold Leaf, Pall-mall, Capstan, Star, Pilot, Bristol and Hollywood are the brands that are marketed by BATB. Dhaka Tobacco Industries Ltd. produces eight brands of cigarettes. These are Navy, Legend White, Five Star, Red & White, K2, Surma and Diamond. One hundred million of the Navy brand are exported quality and are sold in Dubai. Rally, Marise, Sunmoon, Super King, Abul Biri are the main products of Abul Khair Tobacco Company. Java Black and Golden Hill are brands of Jamil Tobacco.Most cigarettes produced and sold in Bangladesh are filter-tipped, with market share stable at around 86% for the past decade, after rising sharply in the 1997. Nearly all cigarettes consumed in Bangladesh are high-tar cigarettes, although lower tar brands are starting to emerge. Most premium brand cigarettes are sold in packs of 20, while less expensive cigarette brands are more often sold in packs of 10. The smaller packs appear to be targeted at keeping pack prices affordable for lower income smokers. Over half of cigarette consumption is of inexpensive brands and about 30% is of mid-priced brands. In contrast, bidi production is much more fragmented than cigarette manufacturing. The top 4 firms account for a little less than 50% of the market, and, according to the 2001/03 Economic Census, there were a total of 9,624 bidi manufacturers, with over 96% of these household based. Among bidi manufacturing companies, Akij Bidi Factory, Ltd, another subsidiary of the Akij Group, is the largest, with an estimated market share of 29.1% in 2009 (GTSS, 2009). Akij Groups ownership of both Dhaka Tobacco Industries and Akij Bidi Factory could result inshared distribution channels and marketing practices. Aziz Bidi Factory is the only other company with more than 10% of the market, while the remainder account for shares of around 5% or less. Most bidis are sold in packs of 25.

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